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But the imminent return of U.S. sanctions on Iran and
bottlenecks keeping U.S. oil from getting to market have fueled
a rally that has taken benchmark oil prices to four-year highs.
While big producing nations say supply is ample, hedge funds and
speculators are increasingly skeptical of that argument, betting
the market could rally further as sanctions on Iran's crude
exports return on Nov. 4.
The bullishness is visible in the U.S. options market. The
number of open positions on $100 December 2019 WTI call options
<CL1000L9> - bets on futures hitting that price by the end of
2019 - has risen by 30 percent in the last week to a record
31,000 lots, according to CME data.
"Over the last two weeks, there's been a lot more evidence that
even some of the larger customers - India and China - are not
going to be buying Iranian crude from November," said John
Saucer, vice president of research and analysis at Mobius Risk
Group.
As a result, he said, "these sanctions are likely to be a lot
more effective than people even thought."
Overall exports from Iran have dropped to 2 million barrels per
day (bpd) in September from 2.8 million bpd in April, the
Institute of International Finance said.
Estimates for how much of Iran's exports could be affected range
from 500,000 bpd to 2 million bpd, and uncertainty over the
impact could ultimately foster price swings in either direction.
Brent crude, the international benchmark, rose above $86 a
barrel on Wednesday, and U.S. West Texas Intermediate (WTI) U.S.
crude hit $76 a barrel, both four-year highs.
The Trump administration's decision to renew sanctions on Iran
prompted a sharp shift from the Organization of the Petroleum
Exporting Countries. After about 18 months of restraining
supply, OPEC agreed to increase output.
Further, Saudi Arabia and Russia recently agreed privately to
boost supply before telling other OPEC countries in an effort to
mollify U.S. President Donald Trump, who has focused his anger
on rising prices.
Oil markets are looking to OPEC and Russia to make up shortfalls
in supply. U.S. production, which sits at a record 11.1 million
bpd, cannot replace Middle East crudes, such as Iranian grades,
in Asian refineries. In addition, transportation bottlenecks are
constraining U.S. output.
"We continue to see price risks tilted to the upside and do not
rule out a spike in oil prices to $100/barrel," UBS analyst
Giovanni Staunovo said.
Open interest in $100 December 2018 Brent call options
<LCO10000L8>, which expire in late October, is currently more
than 50,000 lots, more than any other strike price for that
month, according to InterContinental Exchange data.
(For a graphic on 'Traders bet on $100 oil as Iran sanctions
approach' click https://reut.rs/2Oy7mvY)
Implied volatility for very bullish Brent options that expire
after the Nov. 4 resumption of sanctions has overtaken that for
very bearish options, suggesting increased demand for such
bullish bets.
This spread, or skew, is at its most bullish since mid July.
Open interest in $100 December 2018 WTI calls <CL1000L8>, which
expire in mid-November, has risen to the highest in over four
months at about 15,000 lots.
Many traders said these $100 bets face long odds. Option
contracts used to speculate on far-fetched outcomes tend to be
cheap, and if crude's rally stalls, those positions will expire
worthless. But even a short-term jump could make those options
more expensive, and holders could sell them for a profit.
(Reporting by Devika Krishna Kumar in New York and Amanda Cooper
in London; Editing by Cynthia Osterman)
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